Question

Which of the following indicates fixed cost?

• A. Electricity bill
• B. Expenses on raw material
• C. Wages
• D. Interest on fixed capital

Hint:

To identify a fixed cost, ask yourself: "Does this cost have to be paid even if the company shuts down production for a month?" If the answer is yes (like rent or interest on a loan), it's a fixed cost.

Answer 1

The Correct Option is D

Step 1: Understanding the Concept:
In business and economics, costs are divided into two main categories: fixed costs and variable costs. Fixed Costs are expenses that do not change with the level of production or sales. They have to be paid even if the company produces nothing. Examples include rent, salaries of administrative staff, insurance, and interest payments on loans.
Variable Costs are expenses that change in direct proportion to the level of production. Examples include raw materials, direct labor wages, and electricity used for production.
Step 2: Detailed Explanation:
Let's analyze the options:
(A) Electricity bill: This is typically a variable cost (or semi-variable) because more production usually requires more electricity.
(B) Expenses on raw material: This is a classic variable cost. The more you produce, the more raw materials you need.
(C) Wages: This can be either fixed (e.g., monthly salaries for managers) or variable (e.g., hourly wages for production workers). However, it is not always a purely fixed cost.
(D) Interest on fixed capital: Fixed capital refers to assets like machinery and buildings. The interest on loans taken to purchase this capital is a fixed payment that must be made regardless of production levels. This makes it a clear example of a fixed cost.
Step 3: Final Answer:
Among the given options, interest on fixed capital is the clearest and most definitive example of a fixed cost. The correct option is (D).